October 2013

Defense Budget Picture Begins to Take Shape

As the new fiscal year gets under way, the budget landscape is beginning to shape up. Critical decisions will be made that will have huge implications for defense.

Major adjustments will be required across the defense community — the military services, agencies, commands and industry. Significant decisions are becoming harder and harder to duck.

In fairness, some notable decisions have already been made, beginning with former Defense Secretary Robert Gates’ efficiency initiatives in 2009 and 2010. This was followed by spending reductions of $487 billion over 10 years as stage one of the Budget Control Act of 2011 (BCA). Then came the continuing resolution of 2013 accompanied by across-the-board sequester of funds for failure to comply with the funding caps in the BCA. This caused the latest squeeze as the services were forced to curtail training and maintenance, and to cancel or slow procurements as they reprogrammed funds from procurement accounts to shore up readiness from unacceptable to marginal, at best.

With all that as background, what’s next?

Recall Defense Secretary Chuck Hagel’s Strategic Choices and Management Review (SCMR), the results of which he unveiled July 31. He has followed that up with a mandate to cut headquarter staffs by 20 percent. From fiscal year 2015 through fiscal year 2019, the services are to reduce budget dollars and personnel — both civilian and military — by 4 percent per year, starting, if feasible, in fiscal year 2014.

These cuts apply to personnel, contractor costs, facilities and information technology programs. By organization, they apply to the office of the defense secretary, defense agencies, Joint Staff, service secretaries, service chiefs, service four-star major commands, service component commands and combatant command staffs. Intelligence staffs will be affected as well — both military and national intelligence program-funded centers. The directive is to eliminate and not shift to other areas. “Subordinate headquarters should not grow,” said the memo from Deputy Defense Secretary Ash Carter. Plans are to be submitted Sept. 23 along with the program objective memorandums, which are the military’s five-year budgets.

To implement some of the choices in the SCMR, Hagel has stood up a team that will make efficiency recommendations, to include the aforementioned 20 percent reduction in headquarters and OSD staff.

The team is led by former Air Force Secretary Mike Donley. It will additionally seek to reduce direct reports to the secretary of defense by focusing on the 16 principal staff assistants. The focus will be on streamlining, consolidating and eliminating redundancies. The review will be completed by Sept. 27, with an initial report by the end of the month and monthly reports beginning Oct. 1.

All this will be happening at the same time as Congress and the Obama administration will need to agree on fiscal year 2014 appropriations for the federal government to keep defense and civilian agencies going. We will likely see a continuing resolution with sequestered funds agreed upon and signed into law sometime around Oct. 1, hopefully without a partial government shutdown.

Around the middle of October, the White House Office of Management and Budget has announced, the U.S. government will begin to run out of money, as it will have only $50 billion left to obligate. That is about five days of operation — at $9 billion per day. The nation cannot go into default, so the debt ceiling will have to be lifted or things will shut down.

What can be expected at this stage? The Defense Department is hoping that somehow predictability will come with the fiscal year 2015 budget. The department is planning two budget scenarios. One would be a $150 billion cut through fiscal year 2021, consistent with the president’s fiscal year 2014 budget submission which fails to comply with the BCA. The second budget will assume full BCA compliance and $500 billion in cuts through 2021.

Some of the cuts proposed include the aforementioned 20 percent headquarters reduction. Bloomberg analysts estimate a $10 billion savings over five years and $40 billion over 10 years. This is obviously not enough to make a significant dent in the $500 billion bogey. Along with this will come cuts of five fighter squadrons, two to three carrier battle groups, Air Force bombers, as well as Army and Marine Corps end-strength. Meeting the $150 billion reduction in the president’s fiscal year 2014 budget proposal requires a reduction of 40,000 to 70,000 troops in the Army beyond the current plan of drawing down from 580,000 to 490,000. Cuts larger than $150 billion require either further force size reduction or a “modernization holiday.”

Haven’t we seen this movie before?

The sequester for 2014 will see a base budget of $475 billion with a 16 percent reduction to investments (procurement, research and development); a 12 percent cut to operations, maintenance and military construction accounts; a reduction of 6,000 civilian employees, and a large reprogramming to protect as much combat readiness as possible. One must keep in mind that this would require the concurrence of Congress, and that is far from assured. Although the services would try to protect major key programs — F-35, KC-46A tanker, long-range bomber, major ship buys — some procurement attrition will be unavoidable. Expect cutbacks in purchases of ships, fixed-wing and rotary-wing aircraft, as well as some delays or cancellations of maintenance and overhauls. Some areas such as munitions could see a big hit.

It looks as if the Defense Department will tilt to investment over force size, though getting to major force reductions will take time. As a result, further major pressures on readiness and training are inevitable.

The situation gets even more difficult with the national debate surrounding the possibility of attacking Syria. The discussion so far has swirled around whether we should do it. So far there has been no debate on how ready our forces are, not only to mount and sustain an effective first action, but whether an already lowered readiness status will permit an extended engagement. One must remember that while it may be our decision to initiate hostilities, the enemy and allies will get a vote. We won’t control the evolving scenario.

For a nation like the United States — with its far-flung commitments and allies — readiness, technological superiority and the ability to sustain operations are not optional.